Class War in the Tax Code

I know that taxes are a really boring subject, as is talking about billions and trillions of dollars as if any of us could understand such magnitudes. But a one-sided class war is being fought every day in the U.S. tax code, and getting even a glimpse of the amounts of money involved can change our sense of why taxes matter. If the government would stop redistributing income through the tax code and instead tax investors the way it does workers, homeowners, and consumers, many things that we can’t afford today would be easily affordable.

California, for example, doesn’t have enough money to pay home care workers (who are basically state employees) both minimum wage and overtime – the state is short some $350 million. Those workers average about $17,000 a year, with lots of overtime that is paid at straight wages. In Chicago there’s not enough money to have guidance counselors and social workers in the schools where they are most needed or librarians to staff most of the libraries. The Chicago Teachers Union estimates that it would cost about $300 million to remedy these and other deficiencies, but doing so would have a big impact on educational results. In order to save the Detroit Institute of Arts’ collection from being sold to get Detroit out of bankruptcy, city workers with $19,000 annual pensions had to give up about $900 each while the state of Michigan found $200 million for a one-time contribution to the city’s pension fund.

These amounts seem very large from an individual perspective. Even the smallest, $200 million, is more than 100 times what an average professional worker earns in a lifetime. The cumulative total of $850 million could fund the payrolls of six top teams in the National Football League. But in the world’s largest economy, whose national government now spends about $4 trillion a year, these hundreds of millions of dollars are the equivalent of nickels and dimes.

I have chosen these state and local situations at random, but thousands of state and local governments are similarly “taxed out” politically, if not economically. States and municipalities compete with each other to keep taxes low in order to attract businesses that, they hope, will create more jobs; few of them are in a position to initiate new taxes on investors. The federal government, on the other hand, has lots of room to run in taxing the top income earners and wealth holders.   Local governments tax property wealth, which is widely distributed among the population, but nobody taxes financial wealth, which is greatly concentrated in the top 10% and 1%. Likewise, state and local governments are highly dependent on sales taxes for things like clothes and meals at Appleby’s, which nearly everybody buys, but there is no sales tax when you buy a stock or bond.

This is how class war is waged in the tax code. If financial wealth were taxed like property wealth, and if buying a stock or bond were taxed like buying a shirt or skirt, all underfunded public pensions could be funded; home care workers could make a living wage; we could have the kind of massive infrastructure program we need; veterans wouldn’t have to wait months to be seen by Veterans Administration doctors; and we could cut our debt and deficit at the same time as we cut other taxes. And if income made from investing rather than working were taxed at the same graduated rates as earned income, we could do even more. We could have smaller class sizes and more teachers. We could staff government agencies at levels that would enable them to actually fulfill their functions – including enforcing our labor laws. Add it all up, and millions more workers could have decent jobs.

So why do we tax income you work for at higher rates than income you don’t work for? Because investors are winning a class war that most workers don’t know is being fought. Why does it seem natural to tax real property (houses, buildings and land) but not financial property (cash, stocks and bonds)? Because investors long ago won a class war that home owners don’t realize was ever fought. And why are meals at Burger King taxed but not stocks and bonds? Because investors are winning a class war that consumers don’t know is being waged.

How much additional money would the government have if unearned income were taxed at the same rates as earned income, if financial wealth were taxed at the same rate as property wealth, and if a sales tax was levied when buying a corporate stock the way it is when buying a pair of shoes? I did a little research and found out that it’s quite a lot – at least $800 billion a year. While implementing an equitable system of federal taxation would involve many administrative, legal, and political difficulties, it could solve financial problems at the state and local as well as the federal levels. None of the difficulties is insurmountable, but first we need to simply ask why investors get discounts and free passes in the tax code. Maybe they really are more valuable and important than the rest of us. But let’s discuss that in public rather than simply assuming it in the tax code.

In the meantime it’s clear that if the government taxed investors like it taxes workers, home owners, and consumers, we’d have more than enough money to do all the things I list above. After all, providing what’s needed for home care workers in California, school children in Chicago, and pensioners and art museums in Detroit would only cost $850 million (with an “m”). We could raise nearly 1,000 times that much — at least $800 billion (with a “b”) — if the government would declare a cease fire in the class war and stop redistributing income.

Jack Metzgar
Chicago Working-Class Studies

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For those who want to check my homework, here’s how I arrived at these big numbers.

Unearned income (capital gains and dividends) is currently taxed at 20% regardless of income level. If it were taxed at the same graduated rates as earned income, United for a Fair Economy estimates it would produce $160 billion in additional federal revenue.

Local governments live off wealth taxes, but these are applied only to “real property” (houses, buildings and land) not to financial property (cash, stocks or bonds).   The average property tax rate is 1.38%. According to Dean Baker at the Center for Economic and Policy Research, the total value of outstanding U.S. corporate stocks in 2014 is about $28 trillion. Thus, a 1.38% “property” tax on stocks would produce $386 billion in new revenue. I could not find a number for the total value of bond holdings in the U.S., but a 1.38% tax on bond wealth would surely add enough for a financial property tax to produce at least $500 billion a year.

The Tax Foundation does not compute an average for “combined state & average local sales tax rates,” but among the 47 states that have a sales tax (3 states do not have any), almost all are above 6%. So using 6% as a sort-of-average sales tax and applying it to the $60 trillion in stock trades in 2013, it would produce an astounding $3.6 trillion – nearly enough to fund the entire U.S. Government. This would be wildly unrealistic, as it would wreck the stock market and kill investment, but it gives you a notion of how lucrative even a very small sales tax on stock transactions could be. HR 1000, introduced by Rep. John Conyers, would impose a sales tax of 0.25% on stock trades (that’s a tax of 25 cents on a purchase of $100 in stocks), and that would produce $150 billion in new revenue. This much more modest amount is what I used to get a total of “at least $800 billion.”

 

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8 Responses to Class War in the Tax Code

  1. Pingback: Putnam’s Poignant Folly: Empathetic Blaming | Working-Class Perspectives

  2. Fred Anderson says:

    A later thought:

    Suppose a wealthy person finds themselves with an extra $100 million. They can spend it — let’s say on a humongous yacht — or they can invest it — let’s say in a small mill where 300 workers will be employed. The investment is risky — other competitors will try to snuff you out. The yacht is not — other yacht owners won’t try to sink it. The mill is regulated — think OSHA, EPA, NLRB, FTC, etc. The yacht is (by comparison, almost) not. Running the mill is work. Sailing the yacht is pleasure.

    If we tax consumption (“yachts”) and investment (“mills”) equally, there will be a lot fewer mills.

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    • Jack Labusch says:

      Fred, thanks.

      The theory behind the tax code’s group health insurance deductibility and exemption whitewashes motive. The altruism of the mostly talked-about collective health care ideas of the 1920s and 1930s was essentially hijacked in the 1940s by corporate wallets whose purpose was political and utilitarian. They wanted to, among other things, deflate organized labor and induce corporate dependency.

      The deductibility and exemption remained as though health insurance were charitably motivated, although the purpose of health insurance had been transformed from a means to regularize health care costs into a means to induce labor quietude.

      You’d need to be a real expert to tease out the full consequences of this tax treatment. One is instant, street-level hypocrisy. People insist they work for health insurance enrollment, although the tax treatment alone suggests some other phenomenon.

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  3. Jack Labusch says:

    Taxes? Like accounting, not boring to this non-expert. American Revolution, Whiskey Rebellion, the Taxed Enough Already people, and, most recently, American ex-pats renouncing citizenship to escape the grasp of Internal Revenue.

    I would have never understood the full horror of how group health insurance worked its way into the economy and popular consciousness until I understood the theory of why group health insurance is exempt from taxation.

    Prof. Metzgar, you may want to check Sweden’s experience with stock transfer taxes. My knowledge is headline quality-only, but what I gathered is that global equities dealers simply worked around cost-prohibitive Sweden.

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  4. Fred Anderson says:

    I suspect — but have not reasoned through the argument — that what Jack proposes would be ruinous — especially, for workers.

    Still, it would be interesting to see one of the states institute such taxation so that we might observe its consequences. California, being somewhat isolated by the western deserts & mountains, might make a good test bed.

    And if there are obvious reasons why such might be hurtful to Californians, then perhaps that warns the rest of us.

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  5. Pingback: Class War in the Tax Code | Working-Class Perspectives | Activate! Justice

  6. Curious says:

    Marissa- this article is flawed. Their is absolutely a sliding scale on the gains tax rates for all incomes.

    Most importantly, the author does not point out that this “rich person” has already paid huge taxes on “their capital” which they chose to invest. Their capital can create jobs correct? their capital can also go to zero and they have lost it … the government still has their money.

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  7. Marissa says:

    The tax code in this country is not only unsustainable, but verging on criminal. Those who labor arduously are still incapable of providing for their families while those who do no labor at all are opulently wealthy. How can there be so few with so many and so many with so little. Is that fair, or even kind? A higher tax rate can meliorate or countless issues in this country, and perhaps win the class battle, if not the war.

    Like

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